Crisis in confidence: The China factor

2002-07-24Asia Times

BEIJING - The crisis in confidence in the US economy triggered by the "creative accounting" scandals involving Enron and others has highlighted important differences in the world's two most powerful economies, the United States and Europe. But another emerging economic giant looms in Asia, and it is clear that here, too,  confidence is the key. Here, however, security is the concern, and not so much misleading profit-and-loss figures.

In the United States, creative accounting permitted traditional companies to show performances similar to those in the new high-tech economy and thus compete with Microsoft and its peers for a share of investment from an ever-greedier public.

In this way, one could see the Enron case and the others as byproducts of the new economy. As the new companies showed performances and potentials that were crowding out the traditional companies, the latter lost investment on the stock market. To compete and stay afloat in a world of fast-shifting investment, the traditional companies had to improve their performance. To do that they had to streamline their business and make it more rewarding for the stockholder, who would otherwise shift his investment into new-economy stocks.

Furthermore, the new economy promised new avenues of growth, promises fueled by the uncertainty surrounding the real long-term effects of the computer revolution. Although no one could calculate how much efficiency would improve, everyone assumed such improvements would show up on the balance sheets sooner or later. The lack of clear calculations made the atmosphere heady and investors got carried away, as capitalists tend to do when they smell a period of strong growth. But when streamlining and consolidation failed to provide the numbers needed to lure greedy investors, business leaders concocted new accounting devices.

When the new-economy bubble burst, overall enthusiasm waned and as the flood receded it not only left the lesser new-economy companies stranded, but it also revealed the faults of new-economy accounting. The public felt cheated twice, once by the new economy that had (partly, to be fair) failed to deliver as much as it promised, and then a second time by Enron and its companions that had misrepresented the numbers. The sense of being cheated was compounded by Arthur Andersen, an accounting company that was supposed to check the numbers but instead covered them up; the events of September 11 further shook confidence, because they made the United States fear it could be attacked and brought to its knees.

This is the essence of the failure of confidence US Federal Reserve chairman Alan Greenspan in his recent testimony to Congress spoke about, and this is the reason for the failure of the dollar vis-?-vis the euro. According to figures, the US economy still outperforms the European economy at the moment, but are these figures true? Investors asked that question as they became more confident in the European economy, which had little or no experience with the new economy and creative accounting, and which had endured terrorism for decades without any September 11-type nervous breakdown.

In a sentence: the US economy proved more volatile, for internal and external reasons, while the European one proved more resilient.

That said, it is also true that the European market lacks the US market's ability to face its ghosts, be it the new economy, creative accounting or terrorism, and to bounce back: its volatility is also vitality. No failures in a technology-based economy or accounting have occurred in Europe, yet no technological leaps have taken place either. Despite the failures of new accounting, America's fresh ways of doing business, when not taken to the extreme, made it possible to see the potential of new business and growth; and it forced businesses to look for resources inside and outside the company in order to reap this potential. Little of the kind happened in Europe.

Moreover, when confronted by external threats, such as terrorism or the escalation of war in the Balkans, Europe as a cohesive entity did little by itself; it either sent for US help, or each European government acted on its own. Neither actions served to support the regional currency, the euro, designed to cover almost the whole continent. The euro has no army or police to defend it and so, when under attack, it must call Washington or the headquarters of the governments of the former mark, franc or lira. In such a scenario the euro would surely plummet and the dollar rise again.

The lack of European political unity is reflected in the lack of continental companies. The European companies are German or French or Italian and, if they do merge abroad, it is often with US companies, a marriage less feared than one with another, foreign European company. European companies may expand from one country into another, but they remain strongly based in a single nation. Labor and tax policies, whose liberalization in the United States made possible the new economy, in Europe are still in the hands of individual governments that use them for electoral purposes. No alternative is possible, as there is no real continentally based democratic system. The European Parliament is a house of super-lords with no power if compared with their counterparts in the national parliaments. Simply put: Europe is not a country, and the United States is.

For this reason, Europe has not managed to achieve large growth - or the headaches that go with it. But domestic and external threats are impossible to discount, and the US is considerably better equipped to face both. So it could turn out that what now looks like European resilience may seem, in retrospect, to have been European sluggishness.

All in all, the US seems able to cope with its problems, albeit with some drama, whereas Europe's reactions are much slower, and more deliberate. Europe needs to get its act together, rather than dwelling on short-term US difficulties. However, as long as Europe remains obsessed with its own internal problems, this is not likely to occur soon.

Indeed, many investors now put their money neither into the volatile US or self-centered European. They instead turn to China. (2002-07-24 Asia Times)


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